Global Economics

After Sandy's Pain, There Will Be Gain


A playground slide is surrounded by water pushed up by Hurricane Sandy in Bellport, N.Y., on Oct. 30

Photograph by Lucas Jackson/Reuters

A playground slide is surrounded by water pushed up by Hurricane Sandy in Bellport, N.Y., on Oct. 30

In terms of sheer size (1,100 miles from end to end) and the number of people in its path (some 60 million), Hurricane Sandy was the biggest storm ever to hit the East Coast of the U.S. Estimates of its devastation range from $30 billion in destroyed property and lost business activity to as much as $50 billion. Whatever Sandy’s ultimate price tag, it’s a huge number. But as devastating as it was, Sandy’s impact to the national economy will likely be negligible: The short-term loss to economic output should be made up by long-term spending to rebuild.

The bad news: Your town is damaged. The good news: Construction is upPhotographs by AP PhotoThe bad news: Your town is damaged. The good news: Construction is up

Whether it’s recovering from a war or cleaning up after a natural disaster, periods of severe destruction are usually followed by sharp bursts of economic activity. Money pours in from government and insurers to repair infrastructure. Homes get rebuilt, debris cleared. As a result, the overall economic growth that follows a natural disaster can often outweigh the wealth it destroyed. Economists call this the broken window effect. “To an economist, breaking a window always boosts GDP,” says Michael Englund, chief economist at Action Economics. Englund thinks that Sandy could end up boosting fourth-quarter gross domestic product by as much as two-tenths of a percentage point. “The backfill activity will probably be bigger,” he says. “By the time the rebuild is over, I think we’ll see this as a net positive [for GDP].”

While the full extent of that rebuilding will take months to show up in the economy, the short-term hit to output could be severe. The 12 states in Sandy’s path, from Virginia to Maine, account for about 23 percent of national GDP. Throwing a giant “Superstorm” at one-quarter of the country’s economic engine will have a major impact on businesses over the next few weeks. In particular, holiday spending on items like clothes and toys could take a hit.

That spending won’t vanish, though; it will merely be delayed and redirected. People may cut back on holiday shopping but end up buying a new car to replace the one that got damaged by a tree. Much of the wealth lost in disasters is assumed by global insurance companies, which make good on policies and pump money into the local economy afterwards. That lost wealth doesn’t get reflected in GDP, while the increase in spending does.

There’s also the question of job creation. While a worker probably won’t lose his job as a result of Hurricane Sandy, there’s a chance he might gain one afterwards, particularly if he’s in the construction industry. “We definitely see stronger job gains in response to natural disasters, particularly when economies are coming out of recession,” says Gus Faucher, senior economist at PNC Financial, who has researched the economic effects of natural disasters. He cites two examples: After Hurricane Andrew hit the southeast coast of Florida in August 1992, job growth in Miami went from just under 1 percent a year to more than 5 percent by mid-1993, as more than 1,700 construction jobs were added. In the year after a 6.7 magnitude earthquake hit Northridge, Calif., outside Los Angeles, in January 1994, 16,000 construction jobs were added.

There are exceptions. Hurricane Katrina, the most expensive natural disaster in the U.S. at $150 billion in total economic losses, slowed annual growth in the second half of 2005 from 3.3 percent to 2.8 percent, according to an analysis by the Congressional Budget Office. Katrina knocked out about 20 percent of the country’s refining capacity and damaged more than 100 oil and gas rigs along the Gulf Coast. Within a week, national gasoline prices had jumped 13 percent.

While a number of refineries shut down along the East Coast as Sandy approached, their suspension of operations likely won’t have the same impact because the East Coast facilities handle a far smaller share of refined products. There’s another crucial difference between Sandy and Katrina that could dampen the overall economic impact of the recent hurricane. The East Coast economy is more knowledge-based, with a higher-skilled, better-educated workforce, which makes it more resilient than the blue-collar Gulf Coast economy.

The bottom line: Hurricane Sandy could cost the economy as much as $50 billion, but the payback from rebuilding could end up larger.

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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